ABSTRACT

How do exchange rate changes impact firms' cash flows? We extend a simulation method developed in industrial organization
to answer this question. We use prices, quantities, and product characteristics for differentiated products, coupled with
a discrete choice framework and an assumption of price competition, to estimate marginal costs for all producers. Using a
Monte Carlo approach we generate counterfactual prices and profits for different levels of exchange rates. We illustrate the
method using the market for bottled water. Our results stress that even in a relatively simple market such as this one, different
brands face very different exchange rate risks.